Question

During the first month of operations ended July 31, Western Creations Company produced 80,000 designer cowboy hats, of which 72,000 were sold. Operating data for the month are summarized as follows:

1	Sales		$4,320,000.00
2	Manufacturing costs:
3	Direct materials	$1,600,000.00
4	Direct labor	1,440,000.00
5	Variable manufacturing cost	240,000.00
6	Fixed manufacturing cost	320,000.00	3,600,000.00
7	Selling and administrative expenses:
8	Variable	$144,000.00
9	Fixed	25,000.00	169,000.00

During August, Western Creations produced 64,000 designer cowboy hats and sold 72,000 cowboy hats. Operating data for August are summarized as follows:

1	Sales		$4,320,000.00
2	Manufacturing costs:
3	Direct materials	$1,280,000.00
4	Direct labor	1,152,000.00
5	Variable manufacturing cost	192,000.00
6	Fixed manufacturing cost	320,000.00	2,944,000.00
7	Selling and administrative expenses:
8	Variable	$144,000.00
9	Fixed	25,000.00	169,000.00

	Required:
1.	Using the absorption costing concept, prepare income statements for (a) July and (b) August.*
2.	Using the variable costing concept, prepare income statements for (a) July and (b) August.*
3a.	Explain the reason for the differences in the amount of income from operations in (1) and (2) for July.
3b.	Explain the reason for the differences in the amount of income from operations in (1) and (2) for August.
4.	Based on your answers to (1) and (2), did Western Creations Company operate more profitably in July or in August? Explain. * Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if required. Enter Inventory, July 31 as a negative number using a minus sign. If a net loss is incurred, enter that amount as a negative number using a minus sign.

Absorption Costing Income Statement-July

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1a. Using the absorption costing concept, prepare income statements for July. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if required. Enter Inventory, July 31 as a negative number using a minus sign. If a net loss is incurred, enter that amount as a negative number using a minus sign.

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Score: 0/68

Western Creations Company

Absorption Costing Income Statement

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Sales - (cost of goods manufactured - ending inventory*) = Gross profit; gross profit - selling and administrative expenses = income from operations.

* (Manufactured Units - Sold units) x (total manufacturing costs/manufactured units)

Absorption Costing Income Statement-August

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1b. Using the absorption costing concept, prepare income statements for August. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if required. If a net loss is incurred, enter that amount as a negative number using a minus sign.

Question not attempted.

Score: 0/68

Western Creations Company

Absorption Costing Income Statement

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Sales - (cost of goods manufactured - ending inventory*) = Gross profit; gross profit - selling and administrative expenses = income from operations.

* (Manufactured Units - Sold units) x (total manufacturing costs/manufactured units)

Variable Costing Income Statement-July

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2a. Using the variable costing concept, prepare income statements for July. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if required. Enter Inventory, July 31 as a negative number using a minus sign. If a net loss is incurred, enter that amount as a negative number using a minus sign.

Question not attempted.

Score: 0/110

Western Creations Company

Variable Costing Income Statement

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Sales - variable cost of goods sold* = Manufacturing margin; Manufacturing margin - variable selling and administrative expenses = Contribution margin; Contribution margin - (fixed manufacturing costs + fixed selling and administrative expenses) = income from operations.

*Variable cost of goods sold = Variable cost of goods manufactured - [(Manufactured Units - Sold units) x (variable manufacturing costs/manufactured units)]

Variable Costing Income Statement-August

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2b. Using the variable costing concept, prepare income statements for August. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if required. If a net loss is incurred, enter that amount as a negative number using a minus sign.

Question not attempted.

Score: 0/110

Western Creations Company

Variable Costing Income Statement

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Sales - variable cost of goods sold* = Manufacturing margin; Manufacturing margin - variable selling and administrative expenses = Contribution margin; Contribution margin - (fixed manufacturing costs + fixed selling and administrative expenses) = income from operations.

*Variable cost of goods sold = Variable cost of goods manufactured - [(Manufactured Units - Sold units) x (variable manufacturing costs/manufactured units)]

Final Questions

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3a. Explain the reason for the differences in the amount of income from operations in (1) and (2) for July.

For July, income from operations reported under absorption costing exceeds that reported under variable costing due to part of fixed manufacturing costs that are expensed on the variable costing income statement, but not on the absorption costing income statement.

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In terms of net income, is it better to see an increasing percentage of revenues or an increasing percentage of expenses?

3b. Explain the reason for the differences in the amount of income from operations in (1) and (2) for August.

For August, income from operations reported under absorption costing is less than that reported under variable costing due to part of fixed manufacturing costs from July that are expensed on the absorption costing income statement, but not on the variable costing income statement.

Points:

5 / 5

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In terms of net income, is it better to see an increasing percentage of revenues or an increasing percentage of expenses?

4. Based on your answers to (1) and (2), did Western Creations Company operate more profitably in July or in August? Explain.

Western Creations Company was equally profitable in July and August under the variable costing concept. The difference in income reported under the absorption costing concept is due to allocating fixed manufacturing cost to the July 31 ending inventory .

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Answer 1

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1a. July Absorption Costing:
Sales		$       4,320,000
Less: Cost of Goods Sold		$       3,240,000
Gross Margin		$       1,080,000
Less: Selling and Admin Expenses		$           169,000
Income from operations		$           911,000
Cost of Goods Sold:
Cost of Goods Manufactured	$       3,600,000
No of Units Manufactured	80000
Manufacturing Cost per Unit	$                      45
Cost of Goods Manufactured	$       3,600,000
Less: Cost of Ending Inventory	$           360,000
(8000*45)
Cost of Goods Sold	$       3,240,000
1b. Aug Absorption Costing:
Sales		$       4,320,000
Less: Cost of Goods Sold		$       3,304,000
Gross Margin		$       1,016,000
Less: Selling and Admin Expenses		$           169,000
Income from operations		$           847,000
Cost of Goods Sold:
Cost of Goods Manufactured	$       2,944,000
No of Units Manufactured	64000
Manufacturing Cost per Unit	$                      46
Beginning Inventory 8000*45	$           360,000
Add: Cost of Goods Manufactured	$       2,944,000
Less: Cost of Ending Inventory	$                       -
(8000+64000-72000)*45
Cost of Goods Sold	$       3,304,000
2a. July Variable Costing:
Sales
Less: Variable Cost of Goods Sold			$       4,320,000
Beginning Inventory		$                       -
Add: Variable cost of goods manufactured		$       3,280,000
Variable cost of Goods available for sale		$       3,280,000
Less: Ending Inventory	8000*41	$           328,000	$       2,952,000
Manufacturing Margin			$       1,368,000
Less: Variable Selling and Admin Expenses			$           144,000
Contribution Margin			$       1,224,000
Less: Fixed Expenses:
Manufacturing Overhead Expenses		$           320,000
Selling and Admin Expenses		$             25,000	$           345,000
Net Operating Income			$           879,000
Variable Cost of Goods Manufactured:
Direct Material	$       1,600,000
Direct Labor	$       1,440,000
Variable Manufacturing Overheads	$           240,000
Total Variable cost of Goods Manufactured	$       3,280,000
Units Manufactured	80000
Per unit VC of goods manufactured	$                      41
2b. August Variable Costing:
Sales
Less: Variable Cost of Goods Sold			$       4,320,000
Beginning Inventory	8000*41	$           328,000
Add: Variable cost of goods manufactured		$       2,624,000
Variable cost of Goods available for sale		$       2,952,000
Less: Ending Inventory	0*41	$                       -	$       2,952,000
Manufacturing Margin			$       1,368,000
Less: Variable Selling and Admin Expenses			$           144,000
Contribution Margin			$       1,224,000
Less: Fixed Expenses:
Manufacturing Overhead Expenses		$           320,000
Selling and Admin Expenses		$             25,000	$           345,000
Net Operating Income			$           879,000
Variable Cost of Goods Manufactured:
Direct Material	$       1,280,000
Direct Labor	$       1,152,000
Variable Manufacturing Overheads	$           192,000
Total Variable cost of Goods Manufactured	$       2,624,000
Units Manufactured	64000
Per unit VC of goods manufactured	$                      41
3a. July Statement Difference:
For July, income from operations reported under absorption costing exceeds that reported under variablecosting due to part of fixed manufacturing costs that are expensed on the variable costing income statement, but not on the absorption costing income statement.
3b. august Statement Difference:
For August, income from operations reported under absorption costing is less than that reported under variable costing due to part of fixed manufacturing costs from July that are expensed on the absorptioncosting income statement, but not on the variable costing income statement.
4.
Western Creations Company was equally profitable in July and August under the variable costing concept. The difference in income reported under the absorption costing concept is due to allocating fixed manufacturing cost to the July 31 ending inventory .